Unemployment and Inflation: The Applicablity of Phillips Curve in Malaysia

UNEMPLOYMENT AND INFLATION: THE APPLICABLITY OF PHILLIPS CURVE IN MALAYSIA

MUHAMAD FAIZUL BIN ABDULLAH

BF093571

RESEARCH PROPOSAL

QNTB 313

RESEARCH METHOD

BACHELOR OF FINANCE (Hons.)

UNIVERSITY TENAGA NASIONAL

2015

1. Introduction

The economic growth is an increase in the amount of good and service produced per head of population over a period of time. Economic growth of the country will show the rank of development of that country. Solow (1957) says that determinant of economic growth to be separated out into an increase in inputs which is labor and the capital and technical progress. Economic growth also typically refers to growth of potential output in example is production at full employment.

Labor market is given a key role in the recent literature on economic growth. Labor market is where the employer and the employee interact with each other. If the labor market of a country are increasing and showing some growth means that the level of unemployment of that country are decreasing. Kapsos (2005) said that the changes in GDP will have larger effect on the numbers jobs created or destroyed. So the growth of GDP will bring the job opportunities to unemployed. The employer is competing to hire the best and the employee is competing to be hired and to gain the satisfaction.

The economic downturn is given an impact toward the labor market because generally we known that when the economic downturn occurs the employer will reduce their production cost then normally by reducing their employee numbers. When this economic condition happen, surely the unemployment rate will increase because the supply of job offered are lower than supply of workers. But for the benefits of economic downturn are the employers can take the advantage of getting the employee for a lowest cost because the surplus of employee supply.

When then economic downturn occurs the unemployment will increase then the economic growth slowing down. For the example is during year 1997 the Asian Financial Crisis occurs, most of employee losing their job because of employer cannot hire them on many factor such as the cost to hire employee are high because of the financial crisis. So the unemployment rate are increasing during this time because of the surplus of employee and decreasing of supply of job offered.

The issues of unemployment is an issue that is common to every country in the world does not matter it the developed countries, developing countries and countries with low income are all inevitably face the problem of unemployment. According to A. W. H. Phillips’s (1958) the unemployment and the inflation have inverse relationship where the unemployment rate higher than the inflation rate will decrease and vice versa.